Wages up, prices flat: price the next labour rise into your list
A flat price list does not hold margin when pay rises. A one-hour table of labour share by product shows which prices must move first, and by how much.
Your price list did not change last year, but your wage bill did. Every pound of pay that is not passed into a price is a pound of margin you have quietly given away. The average hides the story: a flat price list can look stable while the products that use most labour lose the most.
1. What goes wrong
Labour costs rise in steps, and they rise on your payroll before they reach your price list.
The result is a slow squeeze. On the products where labour is a large share of the price, each pay round removes margin that nobody decided to give up.
2. Why it is a large problem
The Bank of England's Agents report on what firms are doing. In its September 2026 summary it says: "The cumulative average pay settlement for 2026 has ticked up from 3.5% to 3.6%." It adds that contacts expect "2027 settlements will be similar to or slightly lower than 2026."
The same summary describes firms "passing on a portion of the increase in costs into prices", and notes that "some of increase in input costs may still be passed on in prices in 2027." A portion is not all of it. The gap between what rises in cost and what rises in price is where margin goes.
At the bottom of the pay scale the step is set by law. The Low Pay Commission recommended, on 28 October 2026, that the National Living Wage rises by 3.9% (50p) to £13.21 from April 2027, from £12.71 today according to the government rates page. If you pay near that floor, or pay a differential above it, your own rates tend to move with it. This is direction, not measurement: your payroll will differ.
3. The one-hour method: labour share by product
Take your five biggest products by revenue. For each, find the labour cost per unit (hours per unit multiplied by the fully loaded hourly cost, including employer on-costs) and divide by the selling price. That is the labour share.
Then apply the expected rise in your labour cost. To hold the pounds of margin you earn today, the price must rise by the labour share multiplied by the labour cost rise.
For illustration only, assume a 3.9% labour cost rise for one example business. These numbers are invented to show the arithmetic:
| Product | Price | Labour per unit | Labour share | Price rise to hold margin | New price |
|---|---|---|---|---|---|
| A | £40.00 | £14.00 | 35% | 1.4% | £40.55 |
| B | £25.00 | £5.00 | 20% | 0.8% | £25.20 |
| C | £60.00 | £27.00 | 45% | 1.8% | £61.05 |
| D | £18.00 | £3.60 | 20% | 0.8% | £18.14 |
| E | £90.00 | £22.50 | 25% | 1.0% | £90.88 |
The point is the spread. A single "plus 1%" across the list over-charges product B and still under-recovers product C. The labour-heavy lines need the larger move.
4. Why the principle holds
The Bank of England's Agents describe the same selective behaviour: firms pass costs on "when possible", and are mindful of demand. Passing on the cost where you can, and by the amount each product needs, is what your own table does, product by product.
Tips and tricks for this week
- Use the fully loaded hourly cost, not the wage on the contract. Employer on-costs belong in the labour figure.
- Rank the products by labour share and start with the top two. Those carry the largest recovery.
- Put a review date in the diary for April, when the new rates apply, not for "next year".
- Write down the assumption (for example 3.9%) next to the table, so that you can replace it with your real payroll figure.
If you would like a second view on where your margin is going, the Business Health Check is the place to start. One change, one date: choose the price list line that needs to move first and put the date in the diary today.